## **Learning Outcomes**

After reading this article, you will be able to explain how foreign currency translation differences from foreign operations are treated on the disposal of a subsidiary or branch under IAS 21. You will also be able to identify when cumulative exchange differences are recycled to profit or loss in group accounts and correctly account for recycling on the full or partial disposal of a foreign entity.

## **ACCA Financial Reporting (FR) Syllabus**

For ACCA Financial Reporting (FR), you are required to understand how to account for the effects of changes in foreign exchange rates, particularly in the context of group disposals and recycling of cumulative exchange differences. In particular, you should focus your revision on:

- The requirements of IAS 21 The Effects of Changes in Foreign Exchange Rates concerning translation of foreign operations
- The treatment of cumulative translation differences (CTDs) when a foreign operation is disposed of
- Recycling of CTDs to profit or loss upon disposal of a subsidiary or branch
- The definition of disposal for these purposes and distinguishing full vs partial disposals
- ACCA exam-style calculations and disclosure requirements

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Under IAS 21, what happens to the cumulative exchange differences relating to a foreign subsidiary when the parent's interest is disposed of in its entirety?
2. What is meant by 'recycling' of cumulative translation differences in the context of foreign operation disposals?
3. If a parent sells part of its interest in a foreign operation and loses control, what adjustment is made regarding the entity's cumulative translation reserve?
4. True or False: Translation reserves relating to continuing significant influence (i.e. investment in associate) remain in equity.

## **Introduction**

When a group has foreign operations, exchange differences arise on translation of those entities' results into the presentation currency. IAS 21 The Effects of Changes in Foreign Exchange Rates dictates that these exchange differences are recognised in other comprehensive income and accumulated in a separate component of equity—commonly known as the cumulative translation reserve (CTR).

However, when a foreign operation is disposed of (either fully or such that control is lost), what becomes of these cumulative translation differences? IAS 21 sets clear rules for recycling accumulated exchange gains and losses to profit or loss on disposal. This is a topic frequently examined, often in the context of group accounts.

> **Key Term: foreign operation**
> An entity that is a subsidiary, associate, joint arrangement, or branch whose activities are based or conducted in a country or currency other than that of the reporting entity.
>
> **Key Term: cumulative translation differences (CTDs)**
> The total exchange differences recognised in other comprehensive income and accumulated in a separate component of equity, arising from the translation of the financial statements of a foreign operation.

## **Recycling the Cumulative Translation Difference on Disposal**

When the parent disposes of its entire interest in a foreign operation, or otherwise loses control, significant influence, or joint control over the entity, IAS 21 requires that the cumulative translation difference associated with that operation be reclassified—'recycled'—from equity to profit or loss in the period when the disposal occurs. This ensures all historic foreign exchange gains or losses relating to that operation are recognised in the group's performance at the point of disposal.

> **Key Term: recycling**
> The process of transferring amounts previously recognised in other comprehensive income (OCI) and accumulated in equity to profit or loss upon the occurrence of a specified event, such as the disposal of a foreign operation.

### When Is Recycling Required?

IAS 21 stipulates that recycling of the cumulative translation difference to profit or loss is required when:

- The reporting entity disposes of its entire interest in a foreign operation; or
- The reporting entity loses control, joint control, or significant influence over the foreign operation (even if a financial interest remains).

### What Constitutes a 'Disposal'?

A disposal includes selling, liquidation, loss of control, placement into receivership, or any event where the entity ceases to consolidate, equity account, or proportionally consolidate the foreign operation. Partial disposals where significant influence or joint control continues do not trigger recycling.

### **Worked Example 1.1**

**Theta Group holds 100% of Zeta SA, a foreign subsidiary. The cumulative translation reserve in the group accounts relating to Zeta is a \$1,200,000 loss. During the year, the group sells all its shares in Zeta SA for \$7,500,000. How is the cumulative translation reserve treated?**

> **Answer:**
> On disposal of the foreign subsidiary, the full \$1,200,000 cumulative translation loss is removed from equity and reclassified to profit or loss. The journal entry is:
>
> Dr Cumulative translation reserve \$1,200,000  
> Cr Profit or loss (expense) \$1,200,000
>
> The net effect is to increase the reported loss on disposal of Zeta SA by \$1,200,000.

### Partial Disposals—Retaining Control

If the parent sells only part of its interest in a foreign operation but retains control (e.g., reducing from 90% to 60%), no recycling occurs. The portion of the translation reserve attributable to the non-controlling interest is reallocated, but no amounts are recycled to profit or loss.

### Loss of Control—Continuing as Associate or Joint Venture

If the parent loses control but retains significant influence (associate) or joint control (joint arrangement), a proportionate share of the cumulative translation reserve is recycled to profit or loss, with the balance remaining in equity to be applied to the continuing investment.

### **Worked Example 1.2**

**Lambda plc owns 100% of Omega GmbH (a foreign subsidiary). Omega is disposed of during the year, and Lambda plc retains a 25% investment which will be equity-accounted as an associate. The cumulative translation reserve relating to Omega is a \$400,000 gain. How much is recycled to profit or loss?**

> **Answer:**
> The group must recycle the proportion of the cumulative translation reserve that relates to the interest disposed (75%). Thus:
>
> Amount recycled = \$400,000 × 75% = \$300,000  
> Amount remaining in equity = \$400,000 × 25% = \$100,000
>
> Entry:
>
> Dr Cumulative translation reserve \$300,000  
> Cr Profit or loss (gain) \$300,000
>
> The \$100,000 relating to the residual associate investment stays in equity until that investment is also disposed of.

### No Recycling for Retained Significant Influence

If the parent retains significant influence or joint control, the related share of the cumulative translation difference is not recycled until that residual interest is also disposed.

## **Accounting and Disclosure Requirements**

When recycling translation differences, groups must:

- Remove the related cumulative translation reserve from equity and include it as income or expense in profit or loss as part of the gain or loss on disposal of the foreign operation
- Disclose, in accordance with IFRS 12, the amount recycled and its effect on the statement of profit or loss

### **Exam Warning**

> A common mistake is to omit recycling the cumulative translation reserve to profit or loss on group disposals. The exam may require a calculation or journal entry—be ready to account for the reserve and accurately adjust group profit or loss.

## **Summary**

On the disposal (including loss of control or significant influence) of a foreign operation, all related cumulative translation differences are removed from equity and reclassified to profit or loss (recycled). Amounts are recycled in full if the entire foreign operation is disposed; proportionally if only control is lost. No recycling occurs where control, joint control, or significant influence is retained without loss.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define foreign operation and cumulative translation differences (CTDs) under IAS 21
- Explain when recycling of CTDs to profit or loss is required on disposal
- Correctly calculate the amount to recycle for both full and partial disposals
- Describe the accounting treatment and required disclosures under IAS 21

## **Key Terms and Concepts**

- foreign operation
- cumulative translation differences (CTDs)
- recycling

Translation of foreign operations (IAS 21) - Disposals and recycling